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The United States is the largest consumer goods market in the world – worth more than $400 billion. Consumer and retail accounts for roughly 20% of the US economy.

The sector is going through a major disruption creating incredible tailwinds. Millennials, on the brink of becoming the largest segment of the population, are driving purchasing decisions – demanding more personalized products. Innovative small brands are emerging almost daily to lead the way in what I’m calling the Personalization of Consumer. The emerging brands ($1-10M in revenue) are stealing market share from the big packaged goods companies that have been slow to adapt.

So where are the venture capitalists? In 2014, only ~6% of venture capital investments went into consumer packaged goods and retail. VC funds invested $2.24 billion in consumer products and services and just over $785 million in retail and distribution, according to The MoneyTree Report.

Why aren’t venture capitalists putting more money to work in consumer and retail? Returns are terrific, tailwinds are great and it's not overcrowded like other industries like tech. I’ve heard a lot of venture capitalists try to downplay consumer and retail. Here are the 5 most common arguments I hear versus the facts:

1. Consumer and retail are capital inefficient. Not compared to tech startups. In Silicon Valley in 2013-14 the median series A round was $2.5 million, the median series B and C rounds were $12.32 million and the median late-stage round was $22 million. In 2014 the average Series A raised by companies graduating from Y Combinator was $8M, nearly double the average amount raised in 2011.

Meanwhile, in consumer and retail typically a Series A or B round company will have revenue of $1-10 million (more than tech), and the average raise is only $1-2 million. Let me say that again- in consumer the companies have more revenue but raise less money. One of the beauties of consumer businesses is that they don’t need tens of millions of dollars early on to grow because they don’t have to hire dozens of engineers to build the product. Many VCs have the misperception that these emerging brands maintain costly manufacturing plants, and need large sales and marketing departments, and spend huge sums to build their brand and to pay “slotting fees” for placement in the big retailers (i.e. grocery chains like Safeway and Kroger).

Wrong on every level. Emerging brands can be incredibly efficient. By outsourcing production and sales and marketing and other functions, it is not uncommon for an emerging consumer brand to grow to $10 million in revenue with fewer than a dozen employees. I’ll take that model any day over 30 software engineers burning through Series B funds in Silicon Valley in 18 months.

The cost of building a consumer brand is far less than it used to be. Retailers today are more willing to put new brands on their shelves. Costco, Whole Foods and PetCo are just three big name retailers who have embraced emerging brands because that is what their customers want. In addition, alternative channels like subscription commerce — BirchBox, Love With Food, Trunk Club, and others — are making it easier for emerging brands to reach customers directly. Finally, social media has made it possible to build a following at a fraction of the cost of a national TV ad campaign. Just look at the thousands of views on Youtube for Pop Chips or for Plum Organics before Campbell Soup Company acquired it in 2013. In consumer, companies are often profitable when they hit $10M in revenue.

2. Consumer businesses don’t grow quickly. For those of you that still think it takes 20 years to build a consumer business, I’ll point you to Chobani. The Greek yogurt company became a $5-billion business in seven years. I recently heard about a popcorn company (I won’t name here) that is four-years old and will reportedly do $100 million EBITDA this year. Show me the tech companies that have ever done that.

To be fair though, many tech businesses grow huge vanity metrics very quickly. I recently saw quotes on how many “swipes” occur on Tinder every day. In some ways that makes sense because that’s their core metric. But users don’t pay for that so what does it mean? If Ben & Jerry’s had taken that business model approach- could they give away ice cream for 5 years and then brag about how many pints they gave away each day for free?

3. Consumer goods are fad-driven. Certainly, there are subcategories where fads play a role, but by and large there is much more data to evaluate consumer and retail companies and long-term consumer trends than there is in tech. A consumer business has tangible products, sales, and operating performance that investors can delve into. To raise a Series A, the company often has revenue of more than $1 million. That means you can evaluate their performance at the retail level. Retail level sales data from Nielsen and other sources allows investors to gauge a business’s performance compared to competitors. You are not simply gambling on the vision of a 23-year-old engineer with a 10 slide investor presentation.

At the same time, consumer and retail do not have the technology risk that you see in Silicon Valley, where today’s innovation can be leapfrogged tomorrow or next month. Just look at payments: Paypal seemed unstoppable five years ago, then came Square, then came Apple Pay. The investors who have put $590 million into Square are probably losing a little bit of sleep over Apple’s entry into the payments arena. I’m sure the argument could be made the two aren’t perfect competitors- and I agree. But don’t tell me that there isn’t some meaningful impact. I feel confident saying $590 million is more than any private consumer company in history has raised – they just don’t need to raise that much money.

4. It’s hard to identify consumer and retail companies. True, consumer and retail businesses are spread out across the country. For VC funds, it is easy to write $1-2 million checks in the tech sector because of the concentration of startups in the San Francisco Bay Area. Consumer companies are spread out, and you don’t have TechCrunch and other media outlets to help you identify the latest craze or potentially successful companies. This makes it more costly to find consumer and retail companies and evaluate and invest in them.

I estimate it costs a typical investment firm $100,000 to invest $1 million into an early stage consumer or retail company. That includes travel costs, allocated costs of the investment team, associated deal fees, etc. As a result of those high costs, it doesn’t make sense for most investment firms. Plus, VCs have a built-in incentive to raise larger funds and make larger investments: they get paid on the amount of money they invest (management fees), regardless of performance (carry).

But finding promising new consumer and retail brands is getting easier thanks to technology. Online platforms are curating promising consumer and retail businesses, aggregating unprecedented and invaluable performance data, and making it simple to evaluate and invest. All of this drives down the costs for investment firms to put money to work in this sector. Some investment firms are already realizing the benefits of this model. The majority of capital invested on our platform, for example, is from institutional investors—a fact that speaks not only to the efficiency of the platform, but also to the quality of companies available for investment.

5. VCs need grand slams. This is a structural flaw in the VC model. What if you had an investment strategy where you expected 90% of your portfolio to go to zero? In addition, each time an investment went to $0, a VC fund loses $5-10 million. Because so many investments turn to dust, VCs are in this vicious cycle of having to gamble on the next big thing. They have to believe the winners will be billion dollar companies because the losers are so massive.

In consumer and retail, this doesn’t happen. The strategy is completely different: these investments tend to be smaller investments, and the goal is to have a lower loss ratio (percentage of the portfolio that goes to zero). Consumer and retail companies generally don’t raise tens of millions until they are well past the point of being a proven business.

Amidst rising tech valuations and the corresponding rise in talk of a tech bubble, you have to wonder when more VCs will begin to look beyond this overcrowded space.

Some investment firms have already recognized the transformation occurring in consumer and retail and are deploying capital in this sector. My guess is that it’s only a matter of time before more smart money follows their lead.

Ryan founded CircleUp after nearly seven years of investing experience in consumer product and retail-focused private equity. His experience in private equity exposed him…

Ryan founded CircleUp after nearly seven years of investing experience in consumer product and retail-focused private equity. His experience in private equity exposed him to many great consumer and retail businesses that were too small to obtain funding through the customary private equity channels. Inspired by these often-overlooked opportunities, he founded CircleUp to make funding available to promising companies. Prior to founding CircleUp, Ryan worked at TSG Consumer Partners and Encore Consumer Capital, and served on the board of Zuke’s, The Isopure Company and Philly Swirl. Ryan has been recognized as a “Titan of Retail” by Bloomberg and “40 Under 40” by both M&A Advisors and the San Francisco Business Times. Ryan holds an MBA from Stanford and a dual BA from Duke.